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Stress Testing Our Stock Market Fair Value Calculation

It’s Important To Check How Tweaking Our Assumptions Changes Our Results

Not intended to be investment advice. If you would like to use my code, you can find it here on my GitHub.

Last time, we calculated the fair value of the S&P 500 by projecting out the earnings per share and payouts per share of the S&P 500 (along with a terminal value), discounting each payout to the present, and summing them to get the fair price of the S&P 500. For the details, please refer to my previous post here:

What’s The Fair Value Of The Stock Market Right Now?

But one thing we saw when we worked through our valuation calculations was just how many assumptions we had to make:

• The future path of earnings for the next 10 years (since we chose to explicitly forecast earnings over that timeframe).
• The discount rate we used to calculate our present values. The discount rate represents how we trade off future risky dollars with current safe dollars. This is a highly subjective number, but also one that has a large…